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Longer CEO lives spur pay growth as companies cushion pensions

Pensions are helping to fuel a jump in average chief executive officer pay - and the reason is largely out of companies' control.

PHOTO: AFP

[NEW YORK] Pensions are helping to fuel a jump in average chief executive officer pay - and the reason is largely out of companies' control.

Standard & Poor's 500 Index companies that have filed proxy statements for fiscal 2014 contributed an average US$1.5 million to their CEOs' pensions, compared to an average of about US$550,000 in 2013, according to summary compensation table data compiled by Bloomberg. Pensions comprised about 11 per cent of total CEO pay at those companies, compared to 4 per cent in 2013.

The ballooning pensions were often triggered by preset agreements on CEO retirement pay, rather than new decisions by boards to give their executives more. Longer lifespans and lower discount rates are forcing companies to add more to their CEOs' pensions to meet return expectations and support future payouts, said Steve Seelig, an executive compensation consultant at Towers Watson & Co.

"This whole question about pension values is coming up simply because it's rising so much due to things that aren't really design related," Mr Seelig said.

Corporate pensions provide retirement benefits that are derived from an employee's compensation and years at the company. The board of directors agrees to grant a set plan to an executive that often pays out in installments upon retirement. Contribution calculations take into account how long a CEO may live and a discount rate set by accountants and the companies.

The pension data comes from about 260 S&P 500 companies, at which average CEO pay was US$13.6 million in 2014, compared to US$12.5 million in the year earlier, the data show.

At least 60 companies have more than doubled the amount of money added to their CEOs' pensions since 2013. US Bancorp, PNC Financial Services Group Inc. and Honeywell International have all increased their contributions to CEO pensions this year more than 11-fold. Prudential Financial's John Strangfeld saw the change in his pension value climb to US$20.2 million in 2014, compared to about US$2,500 in 2013, according to a filing yesterday. The change was US$15.6 million in 2012.

The Society of Actuaries, which last updated its mortality tables in 2000, said in October that women and men are expected to live about two years longer than previously estimated, which would require companies to make pension payouts for longer.

That led Aflac to boost CEO Dan Amos's pension contribution by more than fivefold to US$6.8 million in 2014, according to its March 19 proxy filing. The jump accounted for more than one-third of his US$15.5 million total pay, according to the Columbus, Georgia-based company's summary compensation table.

"The change in pension value was driven largely by the adoption of the updated mortality tables," Aflac said in the filing. "The tables increased life expectancy for both males and females." Pay data from the US Securities and Exchange Commission- mandated summary compensation table reports some awards in the year they're granted rather than for the year they're earned. Some awards are restricted, vesting and paying out over a set time frame, and the receipt of others may depend on future performance goals. The summary compensation table also counts changes in pension and the value of perks.

US Bancorp said in its proxy that the "single biggest factor" causing the surge in CEO Richard Davis's pension and non-qualified deferred compensation earnings to US$8.2 million from about US$70,000 was a decline in the discount rate to 4.13 per cent from 4.97 per cent, according to a March 12 filing.

That caused the Minneapolis-based company to boost the present value of future payments, a move that won't increase the benefits payable to Davis, the filing shows. The pension value was US$8.1 million in 2012. Discount rates are partially tied to bond yields, which declined last year.

While the mortality figures and discount rates are causing the costs of funding a pension plan to increase, they aren't necessarily affecting the overall benefits an executive will receive upon retirement, said Brandon Rees, who specializes in pensions in the AFL-CIO Office of Investment. The issues shareholders may have with an executive's retirement plan probably don't relate to the two changes this year, he said.

"There is shareholder outrage, but we shouldn't just place it on the fact that the company is using a lower discount rate," he said.

At General Electric, CEO Jeffrey Immelt's US$18 million pension payment increased by 24 times in 2014 from the year earlier, according to the Fairfield, Connecticut-based company's proxy filing.

Immelt's pension contribution comprised about half of his total reported compensation in 2014, the company's summary compensation table shows. The jump in Immelt's pension came primarily from two "completely external" factors: a drop in the discount rate and the new mortality table issuance, GE said in the filing.